Oct. 09, 2022
October 9, 2022
Before providing comments on the specific questions posed by the Commission, I would like to suggest the guiding principle behind my broad support for securities lending disclosure: the securities traded on public markets are intended to be accessible to the public, and indeed receive considerable value as a result of public investment. While I respect the desire of individual institutions or persons to engage in transactions and contracts privately, the domain for that is not in publicly traded securities. The price that must be paid for access to public markets is public disclosure. As a result, I support all rules to the effect that transactions and obligations in publicly traded securities must also be made public.
Regarding specific questions asked by the Commission:
Re: \"5. Does the proposed Rule not cover any transactions that commenters believe
should be covered? Does the scope of the proposed Rule create opportunities for gaming or
evasion of the reporting requirements, whether through other economically equivalent
instruments or otherwise?\"
Securities entitlements, as commonly held by investors in brokerage accounts, are in essence securities loans. The security intermediary has an obligation in a security to the entitlement holder. Neither the fact that the entitlement holder never received the security to begin with, nor the fact that the entitlement holder is not receiving compensation for this loan substantially change this. In effect, the entitlements represent an obligation in the security from broker-dealers to investors, which should be understood to effect the net aggregate obligation that may exist across the market, especially since intermediaries' financial asset may take many forms, and cannot be assumed to balance out the obligation. In keeping with the goal of this rule, securities intermediaries, as borrowers of the security from the entitlement holder to whom they have an obligation, should file the existence of such obligations, and the existence of each individual obligation in a publicly traded secur
ity, as well as the aggregate net amount of such obligations in publicly traded securities, should be inspectable by the investing/\"lending\" party and by the public.
Additionally, the Commission should ensure that the rule includes options, swaps, and other derivatives that deal in publicly traded securities.
Re: \"4. Should borrowers be required to provide 10c-1 information instead of, or in addition to, Lenders providing such information?\"
At least one of the parties should be required to file the report. The filing party should be required to provide confirmation of filing to counterparties (by end of day at the latest) including a unique identifier of the filing. The Counterparties must be able to independently verify with the commission their receipt of the filing. The public should be able to inspect the filings as well.
In addition, it should be clearly stated that the responsibility for filing should fall on SEC-registered parties, and that penalties for non-compliance should be directed there as well, and not to members of the public that seek to merely use public market services.
Re: \"1. Should persons required to provide information ... be limited to only persons registered with the Commission\".
All entities engaging in the lending of publicly traded securities must either a) be registered with the Commission, or b) receive confirmation from the borrowing counterparty that is registered with Commision indicating that said counterparty has filed a report, and such report must be independently verifiable by the lender. Possibility \"b\" would be intended to protect retail investors whose securities are de-facto borrowed from them by their broker-dealers, while enabling them to still engage in securities transactions via that broker.
Re: \"2. What, if any, are the broader impacts...? Would such a requirement bring more efficiency to the market?\"
The fundamental theory of market efficiency is predicated on perfect information, so in principle, yes. A concrete example, is that as the net obligation in a security approaches or exceeds the available supply/liquidity of a security, the price should increase. Given that multiple market participants are able to artificially create supply and liquidity in the short term, the ability for price discovery via diminishing liquidity is currently suppressed. As a result, providing public information on the net obligation would fill in a gap and allow for more efficient price discovery.
In conclusion, I hope that the Commission implements rules effecting greater or total transparency in publicly traded securities, that this includes securities entitlements, that the responsibility for executing this transparency falls on institutional parties, and that transparency around filing is plainly and independently verifiable by investors and the public.